Having a minimum order quantity (MOQ) is a necessary evil in the wholesale, manufacturing and distribution business. It protects suppliers, but potential buyers hate it.
But what is minimum order quantity exactly? Why should your business implement it and how can you do it? Are there any alternatives to MOQ? Also, if you are a buyer, how do you deal with it?
Our blog article will address these questions and more. Learn how suppliers can benefit from using a minimum order quantity and how buyers can make it worth their time.
What Is Minimum Order Quantity
The definition of minimum order quantity or MOQ for short is the minimum quantity of goods a customer needs to order to start purchasing from a business. If the customer is unable to meet the MOQ requirement, the supplier will not sell their products to that particular customer.
If you are a supplier, allow us to start by telling you why having a minimum order quantity is important for your business.
If you are a buyer, do not worry, we will explain how to deal with your supplier’s minimum order quantity later in this article.
Why Implement A Minimum Order Quantity
The main objective of setting a wholesale minimum order quantity is to increase revenue quickly by incentivizing customers to order in bulk. Here are several other reasons why your business might need to have a MOQ.
1. Remain Profitable
Your business might have to sell products in large quantities if it wants to break even selling goods at a low cost. With a MOQ in place, you can weed out good customers from bargain hunters. Thus, you can focus your efforts on the more profitable customers who see enough value in your goods to purchase them in larger quantities.
2. Increase Inventory Turnover
In order to build your finished goods, your company might be ordering raw materials and parts from other suppliers at a certain minimum order quantity. To ensure a healthy inventory turnover, your business might have to sell your products at a certain MOQ to justify the raw materials costs. If the products do not get sold quickly, they might spoil or expire, resulting in lost revenue.
3. Made-To-Order Goods
Your company may also be operating on a made-to-order business model where you produce products based on customers' orders and demand instead of keeping warehouse stock. For production to generate sufficient profits, your business can only start production if there is a sufficient order quantity. Thus, a minimum order quantity helps to ensure that there is sufficient demand for your products to start production.
Minimum Order Quantity Formula: Calculating your MOQ
Different products have different minimum order quantity depending on their value and product category.
While there isn’t a strict formula for calculating your minimum order quantity, here are some considerations to take into account when setting your ideal MOQ.
1. Raw Material Costs
You probably purchased your raw materials from suppliers who have their own MOQ requirements. To remain profitable, you will need to calculate your total raw material production costs and use it to find the minimum number of products you need to sell to sufficiently cover these costs.
2. Your Average Order Size Vs What You Want Your Quantity To Be
If your wholesale business is just starting out or if you do not keep track of your historical order data, finding out your average order size will be difficult.
However, if you can access your company’s historical order data, one possible way to set your MOQ is to set it just above your average order quantity. This is a good starting point to test if your customers who are ordering slightly below your new MOQ are willing to increase their order quantities. Furthermore, this is an effective method to boost order volume without putting pressure on your best customers. After a trial period, you can then adjust your minimum order quantity accordingly to your customers' reaction.
3. Average Profit Per Item
One good way to determine how much profit you earn per order is by working backward from your target profit. When working out your target profit, you should also take into account factors such as additional costs for damaged or unsold goods. This would create a more accurate representation of the actual profits you might earn.
4. Worst Case Scenario
While every business does not wish to encounter a worst-case scenario, it is good to plan for it. You will need to ensure that the minimum order quantity you set will help your business earn enough revenue to cover these scenarios.
Alternatives To Consider?
Instead of only using minimum order quantity for your wholesale orders, there are other similar alternatives you can use.
1. Wholesale Minimum Purchase Amount
This is the minimum amount enforced on your customers’ total order value for them to qualify for wholesale pricing of your products. Using this ordering rule helps your business to maintain a certain minimum value on customers’ regular orders. It also helps you to forecast revenue more easily as you can expect a minimum amount of income from your regular customers.
2. Wholesale Minimum Per Product
This is the minimum quantity you set for a specific product instead of implementing it for the whole order. This could be useful for your business if you do not wish to put strict minimums on your entire order but only for specific products which you need to sell in large quantities to generate a profit
One point to take note of is that these alternatives are not mutually exclusive to each other. You can mix and match these rules and apply them together or use it separately depending on your business’s needs.
How do you deal with MOQ if you are a buyer?
On the flip side, if you are a buyer facing minimum order quantity set by your suppliers, what is the best way to approach it? Since you know that wholesalers set minimum order quantities to find their best buyers and remain profitable, you can try to present your business as their ideal client and look for a deal that is the most mutually beneficial for both parties.
We have some tips that might just help you out.
1. Negotiating a lower price?
Sometimes all you need to do is to ask. While suppliers might not be willing to lower their prices, you will never know if you do not try.
If you develop a good working relationship with your supplier, they might be willing to lower their prices if it’s a slow time of year for them or if they are facing an overstock situation.
2. Purchase From Legitimate Online Wholesale Markets
There are established B2B marketplace such as Alibaba or Amazon Business to purchase your wholesale goods from an extensive range of suppliers. On these platforms, you can compare prices and features to find the right supplier for your needs.
The best part about online marketplaces is reading reviews from previous customers and learning about their experience with the supplier. This will help you to vet and filter the reliable suppliers from the dishonest ones.
Furthermore, with higher competition in B2B marketplaces, you can expect suppliers to offer lower or non-existent MOQ to stand out from the crowd.
3. Purchase From Trading Companies
Trading companies can place one large order for multiple companies. Your business will enjoy a lower price for the good without needing to place a large order to meet your supplier’s minimum order quantity. This helps lower the prices of the MOQ for all buyers involved without the need to hold more inventory than your business needs.
If you are looking for a solution to easily implement all these different ordering rules for your customers, then Sweet is the solution for you.
Sweet is an inventory & order management solution designed to help small & medium business streamline their operations. One of our features is the ability to set and manage different pricing and ordering rules such as those mentioned in the article. Your customers can view these ordering rules through our B2B eCommerce portal, thus simplifying your ordering process.
To find out more about Sweet and how it can help your business, sign up for a free demo with us today.